Julian Zelizer: AIG bonuses follow an American tradition

[Julian E. Zelizer is a professor of history and public affairs at Princeton University's Woodrow Wilson School. His new book, "Arsenal of Democracy: The Politics of National Security -- From World War II to the War on Terrorism," will be published this fall by Basic Books. Zelizer writes widely on current events.]

... Traditionally, American politicians in times of crisis have resisted aggressive interventions by government into business which would tamper with managerial prerogatives and profits.

The political value of this strategy has been clear: It helps elected officials in the White House and Congress sell federal programs in a country stubbornly resistant to many kinds of government interventions in the private sector (though often happy with the interventions after they receive the benefits). It also dampens corporate opposition to government programs in moments when such programs are urgently needed.

In times of war, middle-of-the-road intervention has been the standard model of American governance. Presidents Woodrow Wilson in WWI and Franklin Roosevelt in WWII needed factories to quickly shift from producing manufacturing goods for private markets to producing wartime materiel.

But Wilson and Roosevelt both avoided government-centered programs, instead relying on business to do the work for government through voluntary arrangements and financial incentives.

Business was allowed to make specific decisions about production and to retain profits (though Congress used progressive taxation to mitigate some of these benefits and Roosevelt issued a largely symbolic executive order to limit the after-tax income of the wealthy in 1942 which Congress overturned in 1943). Incentives were offered from the start of the mobilization to assist in the process.

Both presidents established wartime boards to manage production, boards headed by business leaders: Bernard Baruch for President Wilson and Donald Nelson for FDR.

As FDR's Secretary of War, Henry Stimson, noted in his diary in 1940, "If you are going to try to go to war, or to prepare for war, in a capitalist country, you have to make business make money out of the process or business won't work." The outcome of this arrangement was that business retained enormous power over the production process and executives made money.

In the 1940s, a small group of the nation's biggest corporations received the lion's share of military contracts. Wartime agencies were staffed by "dollar-a-year men" who were business executives temporarily working for the government in exchange for a small wage. According to The New Republic, however, altruism was not their primary motivation: "Concern for the war is secondary to self-interest and the jealous protection of their competitive positions."

During the 1930s, the profits from WWI became an issue that opponents of the war tried to use against FDR as he called for intervention overseas to stop the expansion of Nazi power. During the 1950s and 1960s, the middle-of-the-road model to handle Cold War programs produced immense anger toward the development of a "military-industrial complex" that reaped enormous profits from the fight against communism.

Americans have also depended on middle-of-of-the road intervention in periods of economic crisis. One of striking aspects of the New Deal was that during the worst economic crisis in the nation's history, FDR resisted directly taking over American business.

The National Recovery Act (1933), for instance, established voluntary codes of production without any mechanism of enforcement. Under General Hugh Johnson, the act depended on business voluntarily complying with the codes. Those doing so received a Blue Eagle sticker to place on their windows so that consumers would know to purchase their goods. The program was failing by 1934, before the Supreme Court ruled it unconstitutional, because businesses were not following the agreements.

The historian Alan Brinkley has written about how the sentiment for intervention into business that did exist faded even more after 1937 when liberals turned to government spending as the method to pump the economy.

Now we have seen similar results emerge with the financial bailout. The administration quickly backed off from any proposals that could be characterized by their opponents as nationalizing the banks or as taking over the institutions that they were seeking to save.

As a result, like many of their predecessors, the White House and Congress allowed management the flexibility to make decisions, such as the bonuses, which have already come back to haunt them.

During the next round of negotiations, the administration and Congress might rethink their earlier approach, indeed the approach we have taken to economic intervention since the progressive era of the late 19th and early 20th centuries....